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Cowen on Gordon

The title is a bit cheeky. It is not Cowen on Gordon, really. It is about Tyler Cowen’s review of Robert Gordon’s book – ‘The Rise and Fall of American Growth’ – in ‘Foreign Affairs’.

One does not easily criticise folks like Tyler Cowen and Robert Gordon. Tyler Cowen does not commit that mistake with Robert Gordon’s book. So, I shall try and not commit that mistake too, on Tyler Cowen for his review of a book that I have not read yet, although I have read snatches of it – through long excerpts published in Bloomberg and also watched the well-put together interview/conversation on the book by PBS. Just blogged on the subject some six weeks ago.

Tyler’s main message is that no one knows and no one can know. Future is essentially unpredictable. Very sound. However, Tyler Cowen confronts productivity pessimism of Gordon with his own counter predictions. Just to remind his readers and him perhaps, they are as fallible as Gordon’s are.

Aging in western societies with their nuclear families and loneliness is hardly a recipe for innovation and productivity improvements. It is quite possible that today’s exciting technologies cause such a big short-run leap in our material well-being that they increase the mental void proportionately, leaving us feeling empty, depressed and rootless. Technology increases choice. Choices are inherently complex and human beings revert to decisions chosen for them (default mode) when confronted with complexity. Ask Daniel Ariely and Daniel Kahneman.

Although one should not read too much into reports such as this and this as there could be many factors at work and many explanations are possible, including easy recourse to prescriptions where none might be needed, there is a possibility that it represents some real serious mental health issues. Can such a population be productive and innovative at work, if the phenomenon were real and spreading?

In other words, even if there is a productivity surge near-term due to all the innovations that Tyler Cowen mentions (a decade or two?), over a generation or half a century, Gordon’s pessimism stands a better chance. May be.

Second, if one went through the pace of innovation and compressed economic growth over the last two hundred and two hundred and fifty years, the pace has been staggering. So much economic growth has been compressed into such a short time-frame that certain reversion to mean is inevitable and even desirable.

The third question to ask is whether innovations are possible at all without any pain of restructuring. Do zero interest rate policies, quantitative easing policies and negative interest rates blunt innovation as profits are easier to come by, without much exertion? In other words, is there any connection between super-normal (well above average) profit margins and falling productivity? In general, they should be correlated positively and one would even expect mutual causation between the two.

But, the fact that profit margins have been rising well above historical highs of the last five decades even as productivity growth has been declining (and is even negative) tells us something about the source of such super-normal profit margins and what is causing them. The same force that is causing them might also be rendering productivity unnecessary for businesses.

Fourth, as long as there is excessively high inequality, will workers be motivated to increase productivity? In other words, is there a need for some respectable real wage growth for productivity growth to stay in positive territory? May be, when the current cycle of ‘financial markets and asset prices driving economic outcomes and managerial compensations’ end, productivity might revive.

Tyler Cowen writes finally that the one useful thing about Gordon’s book is that it (unintentionally) weakens the case for pessimism. I hope he is right and that the optimists, smoking their own piped dreams, are not caught unawares.